A smouldering cigarette on a sixth-floor balcony sparked a fire in the early hours of November 25, 2014, which raced up 13 floors of the building in only 11 minutes. An investigation by the Metropolitan Fire Brigade found that the cladding material, imported from China, does not meet Australian standards and should never have been used on a high rise apartment.

Despite an order from the city council, the builder wants to leave the facade in place and install sprinklers to put out any fire that does erupt.

Fire engulfs the Lacrosse building. Photo: MFB

Lacrosse tower apartment owners now face a tough choice: leave the cladding in place and accept the sprinklers or fight the builder in court.

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Any dispute over responsibility for the cost of fire-proofing could act as a precedent for the thousand or so other buildings in Australia found to be covered in the non-compliant cladding.

The Fire Brigade put blame for the blaze's spread squarely on the cheap cladding, which CSIRO testing has found to be highly flammable.

The City Council has demanded the building be made compliant with Australian building standards by replacing the cladding with an alternative that meets Australian standards.

Fairfax Media understands that builder LU Simon initially proposed a behavioural change solution, in which residents of Lacrosse would be banned from storing items on the building's balconies, and building overcrowding would be managed.

That proposal was knocked back by the city council, a decision immediately appealed by LU Simon.

If that appeal is unsuccessful, the 312 owners of apartments in the tower essentially have two other options.

LU Simon has offered to install sprinklers on the balconies to extinguish any fire that occurs, at no cost to the home owners. The sprinkler solution has gone to the city council for approval.

The second option, full removal of the cladding, will require the owners corporation to pay upfront to have the cladding removed and replaced before attempting to recoup their loss by suing LU Simon for compensation.

"LU Simon are of the view that they haven't done anything wrong," Fraser Main, the group managing director of Trevor Main, Lacrosse's facility manager, said. "They don't want to accept formal liability. They are a financially strong and reasonably well established company. They know if they get an outcome that's compliant, it may well cost them less than the legal fees to fight a battle."

Half of Melbourne's newest high-rises are covered with non-compliant cladding, and there are estimates more than a thousand buildings Australia-wide could be compromised.

Colin Grace, a senior partner at body-corporate law specialists Grace Lawyers, suspects LU Simon is fighting so hard because it is aware the case may set a precedent.

Mr Grace believes if LU Simon's appeal fails, Lacrosse's owners corporation would have a very good chance of extracting compensation in the courts.

Fairfax Media understands several law firms have already worked through simulated legal actions against builders in the case that LU Simon's appeal fails.

A spokesperson for LU Simon said: "We are working with relevant parties to try to resolve these issues. Whilst these processes are under way, and particularly until the separate investigations have concluded, it is inappropriate to comment further."